With the arrival of the holidays, it means plenty of people across the globe will be visiting friends and family in cities all over the world. There are flights to book, rental cars to reserve, and of course, figuring out where to stay. A few years ago, the options were limited to hotels and motels or friends and family. Depending on the relationships, sometimes there was really only one option.

Airbnb screenshot

Airbnb screenshot courtesy of Gustavo da Cunha Pimenta, CC BY-SA 2.0.

However, the Internet has allowed a new cottage industry (pun intended) to pop up: homeowners can rent their digs to visitors in town. Sites such as HomeAway (founded in 2005) and Airbnb (founded in 2008) help connect owners and travelers. These peer-to-peer marketplace companies—which also include companies such as Uber (founded in 2009) and Lyft (founded in 2012)—are part of the new “sharing economy” that matches those who own something valuable but underutilized (such as a home or a car) with others who could use that asset on a short-term basis.

Many consider Airbnb to be the poster child of these disruptive new businesses, and while the startup has done well in 2014, it has faced criticism and questions about how it has affected the real estate market. On the surface, it appears Airbnb is filling a need: visitors who need a place to stay and either don’t want a hotel room or can’t find or afford one now have new options. Homeowners have a new means of monetizing one of their assets, something that has been particularly appreciated in what has been a very difficult economy. Everybody wins. That is, until people start losing.

In major cities such as New York City and San Francisco, affordable apartments are in short supply. Some renters have found that they can make solid money renting out an extra room, couch, or even the whole apartment. In some cities, renters are using their homes and apartments like mini-hotels, an idea that is quickly catching the attention of government officials.

New York City recently went to war with Airbnb over residents operating illegal hotels by renting out apartments to travelers. The State Attorney General filed subpoenas to obtain records for Airbnb listings in New York City and discovered that more than 70% of the listings violated City laws. It seems that a small number of large-scale operators are using the service to run illegal hotels, including one host who is reportedly administering 272 units in the city.

Critics in San Francisco claim that the supply of available apartments has dropped as some landlords have discovered that it may be more profitable to focus on travelers instead of long-term renters. They argue that services such as Airbnb have strained the city’s real estate market and made it tougher for those just out of college or new to the city to find a place to live.

Some individuals are fighting back. One San Franciscan sued his landlord, alleging that he was evicted so his apartment could be listed at a higher price on Airbnb. The former tenant, Chris Butler, paid $1,840 per month, well below the $125 to $145 a night the apartment was listed for on the home-sharing site.

Brooklyn loft from Airbnb

Brooklyn loft from Airbnb courtesy of Venturist, CC BY 2.0.

Just as in New York, it seems that the majority of hosts are using the service as it was envisioned, renting out space in their own homes. However, according to data gathered by Web data extraction firm Connotate Inc., about 13.6% of San Francisco’s hosts list multiple properties. Some of those multiple-listers are property managers such as AirEnvy who handle Airbnb rentals on behalf of owners, but some are likely operating rentals. Partly in response to complaints about services such as Airbnb, San Francisco is now working on legislation to protect rental housing.

It’s not all bad news though. Some Airbnb hosts have commented that without the extra income, they would not have been able to keep their homes. In addition, a 2012 study that Airbnb commissioned of its economic impact on San Francisco found a positive “spillover effect” from rentals through the service. Because an Airbnb rental tends to be cheaper than a hotel, visitors stayed longer and spent $1,100 in the city on average, compared with $840 for hotel guests; 14% of Airbnb guests said that they would not have visited the city at all without Airbnb.

There’s another reason cities want to crack down on home-sharing services such as Airbnb. Depending on location, many listings violate zoning laws, property rental laws, health and safety laws, and laws requiring hosts to pay hotel occupancy tax. To assist with federal U.S. tax compliance, Airbnb collects taxpayer information from hosts so they can provide an account of their rental income earnings each year via 1099 and 1042 forms; however, responsibility for complying with all applicable laws and paying all appropriate taxes, including hotel occupancy tax, remains with the host. The only exceptions are in San Francisco; Portland and Multnomah County, Oregon; and Amsterdam; Airbnb has made agreements with government officials in these locations to collect and remit local occupancy taxes on behalf of hosts, but hosts remain responsible for all other applicable taxes.

For now, Airbnb continues to grow, even as cities struggle to figure out how to deal with the company’s effects on the housing market. Inc. Magazine named Airbnb the top entrepreneurial business of the year for 2014, with more than 800,000 listings worldwide. Two things seem clear—the so-called sharing economy is still growing, and the tug-of-war between sharing economy companies such as Airbnb and city and state governments is just getting started.